A mortgage loan approval after a bankruptcy can be a little challenging, but very much achievable.
With a little effort and the right guidance, you too can own a home – a decision that can significantly help you rebuild financially if done right.
The rent you are paying now won’t enrich you in any way, but the right real estate purchase can be something you can continue to build on.
Here are the wait times for the various loan programs – the first step is to insure enough time has passed since the discharge:
Chapter 7 Bankruptcy – 2 year wait
Chapter 13 Bankruptcy – minimum of 12 months on-time payments must be documented for the debt restructuring, and approval from the Bankruptcy Court is necessary.
USDA Rural Loans:
Chapter 7 Bankruptcy – 3 year wait
Chapter 13 Bankruptcy – 12 months of on time payments documented on the debt restructuring and approval from the Bankruptcy Court
Conventional Loans:
Chapter 7 Bankruptcy – 4 year wait
Chapter 13 Bankruptcy – 2 year wait from discharge, or 4 year wait from dismissal
Exceptions can be made to these wait times IF extenuating circumstances can be properly documented to have caused your bankruptcy filing – such as a big company lay off. The key is to be able to show a significant income loss directly connected to the derogatory credit remarks on your credit report (late payments, collections etc).
If a foreclosure was included and discharged in bankruptcy, the above wait times will apply (foreclosure waiting periods are generally a bit longer).
Step 2. The last thing you probably want to do after a bankruptcy is get credit again, but it is a necessary step.
You need to make sure you open at least 2 lines of credit and make on time payments, so you can show at least a “clean” 12 months history.
Most people get an auto loan and a secure credit card and that is enough. If you don’t need a car, then consider opening 2 secure credit cards, and only use them every few months – enough to have some activity on there. No need to carry a balance, in fact, I highly advise against it.
Step 3: Assuming enough time has passed since your bankruptcy and you have now re-established some credit, your focus should be on showing financial stability.
If your credit score is under 640, be prepared to meet the following requirements:
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Make sure you have 1 year of on time rental payments that can be documented. This means you were not overdue on your rent by more than 30 days.
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Your bank statements should not show any “non sufficient funds” transactions or overdraft fees (VA will allow them with a good an explanation, but on FHA loans you will get denied). Opening a new bank account and waiting 2 months before applying can be a solution – as long as the NSF/overdraft fees were a random occurrence and not an indicator of difficulty meeting your financial obligations.
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You cannot have any late payments on your credit report in the past 6 months
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You should be employed at your current job for at least 1 year.
Filing for bankruptcy is not the end of the world – it is a legal chance at a fresh start. Use it wisely and make the best out of it. After all, your best teacher is your last mistake.
I mentioned that buying a home can help you rebuild financially, and here is my suggestion on how to achieve that:
Consider a home in a price range that will result in approximately the same dollar amount for the mortgage payment as you are currently paying in rent (or even cheaper!). Just because you can get approved for a higher payment doesn’t mean you should necessarily do it.
Unless you can afford a great deal, your home should be an investment, not a liability.
You will enjoy perks such as tax deductions, and building equity over time. But the mortgage payments should be a comfortable amount that allows you to save for the unforeseen, such as a plumbing issues or a water heater breaking down.
Newer homes will be less likely to have problems, but it can still happen.
In your search, don’t discard older homes with “good bones”, as they will often give you the absolute best bang for your buck. Look beyond appearances to see the true potential.You can do lots of the cosmetic stuff yourself for cheap, and even if you’re not particularly handy, there are YouTube videos out there for learning anything!
It’s really nice to fantasize about growing old in a beautiful home, raising a family and having grandchildren visit. But keep in mind that things change, and your needs will likely change.
The home you buy right now might not be the home you’ll still want in 5 years – your financial situation might improve, or you might decide to move out of state. You might even welcome triplets into your family and find yourself in need of more space!
Your new home does not need to be perfect – it just needs to be the right for you. Compromise on what’s not important, and prioritize what matters.
Hope this information helps. If you’re thinking about applying, take a moment to send me an email with any concerns you might have. A little credit preparation work prior to an application can go a long way towards an approval, and a better interest rate.
To pull the trigger, apply online, and give me a couple of hours to issue a Pre-Qualification letter if one is needed.
